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Opportunity Cost

 

Due to the existence of the economic problem economic agents are forced to make choices regarding how resources are to be allocated.

You have 40, do you spend it on a t-shirt or a night out? Does the government spend 100 million on healthcare or weapons?

A rational economic agent will choose whatever gives them the greatest amount of satisfaction (economists call this utility).

The utility you lose from not being able to have your next best alternative (the second choice) is called the opportunity cost. If you spend 40 on a night out the opportunity cost will be the t-shirt. If the government spends 100 million on weapons the opportunity cost will be healthcare. If a school decides to spend 1,000 on a new computer the opportunity cost will be 20 tables.

Further Reading

Opportunity Cost
Produced by Drexel University
Opportunity Cost

 

 

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